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If done correctly, buying a stock following an earnings release can be lucrative. Recent investors in Tesco (LSE:TSCO) shares can attest to this. The FTSE 100 groceries retailer has enjoyed a share price gain of nearly 20% since full-year results were reported just over three weeks ago.
So, why’s the Tesco share price skyrocketing? And can the supermarket continue to deliver strong returns for investors this year and beyond?
Investment gains
Tesco shares were taking a beating before the company’s results day on 10 April. Amid fears of an intensifying price war in the UK grocery sector, the stock had fallen 17% in a month after suffering further immediate declines when the earnings report was released.
However, plucky investors who put £5,000 into the supermarket on earnings day would have been able to buy 1,589 shares. Today, that position would have a market value of £5,976.23. That’s nearly £1,000 of profit in under a month!
Granted, buying stocks on the earnings date doesn’t always work out. That’s why I focus on multi-year investment opportunities rather than short-term share price movements. Still, fortune would have favoured the brave here.
Earnings and competition
Indeed, there was plenty to cheer about in Tesco’s financial results, despite the initially negative market reaction. Particular highlights included a 10.9% improvement in underlying operating profit to £3.1bn and a new £1.45bn share buyback programme to be completed by April 2026.
But forward guidance was cautious. Underlying operating profit’s expected to shrink by £0.1bn to £0.4bn this financial year. It appears the board may have been spooked by ASDA’s claim to have a “pretty significant war chest” that would allow it to slash prices and endure years of weak trading in a battle for market share.
Ferocious competition isn’t new in Britain’s thin-margin grocery sector. However, ASDA’s price cuts on nearly 10,000 products suggest the latest developments should be taken seriously.
Tesco claims a massive 28.3% market share, equipping it with significant economies of scale and firepower to respond to rivals. That said, a high net debt burden of £9.5bn is a concern because it could limit the company’s flexibility.
Nonetheless, I think Tesco’s forecasts are deliberately conservative, giving the firm plenty of leeway to deliver pleasant surprises. With time to digest the firm’s results and the competitive landscape, it seems traders agree, hence the recent surge in the Tesco share price.
It’s worth noting that Tesco was the second-best performing supermarket in the latest Which? customer satisfaction survey for in-store shopping, trailing only Marks and Spencer. By contrast, ASDA languishes at the bottom of the table. This raises doubts over its ability to attract customers away from the UK’s largest grocer, especially if standards slip further in an escalating price war.
I’m holding my shares
Overall, I think Tesco shares are well-positioned to deliver further growth. I’m keen to maintain the position I hold.
Competition risks shouldn’t be overlooked, but the stock’s forward price-to-earnings (P/E) ratio of 12.84 suggests there’s still good value in the business today, making the shares worth considering. Plus, there’s a handy 3.7% dividend yield to boost the investment appeal.
Ultimately, prudent guidance could prove to be a shrewd move. I wouldn’t be surprised if Tesco beat expectations.
